DP

Fellow investors: $NFBK and $CLBK look like highly asymmetric bets. Northfield Bank (NFBK) and Columbia Financial (CLBK) are New Jersey-based community banks that provide traditional banking services to local consumers and businesses. In the next few days, CLBK is set to close on its acquisition of NFBK. CLBK will fund the acquisition with proceeds from a ‘second-step’ IPO. CLBK is already partially public. It will now become fully public. The market today values both companies as little more than merger arbs. NFBK remains anchored to its takeout price ($14.50/sh at the midpoint), while CLBK, adjusting for the stock split, trades essentially in line. What that misses is that both NFBK and CLBK offer investors the opportunity to purchase pre-IPO shares of the combined company at an extraordinarily low valuation — one that is difficult to reconcile with the quality, scale, and earnings power of the business. On a pro forma basis, CLBK will be a ~$20bn in assets institution earning solid returns (1.1% ROA / 10.5% ROE) on a very high quality loan book (0.1% NCOs/Loans). The market today is offering us that for less than the company’s liquidation price — roughly 0.9x of TBV. For context, few banks of CLBK’s size have traded at such a valuation in the past two decades. Peers reached that level only in 2011 amid the Great Financial Crisis and 2023 amid SVB bankruptcy. Today, even worse-performing regional peers such as OCFC trade at 1.0x. Banks with similar profitability metrics trade at 1.4x to 1.8x, roughly +90% higher than today’s valuation. See below for a comps sheet. CLBK sticks out like a sore thumb. You can also make a strong case that the combined company should trade at a healthy premium to peers. The loan book has been among the cleanest in the peer group for well over a decade. Earnings growth should also well outpace peers as excess IPO capital is deployed into loans and share repurchases. And at roughly $20 billion in assets, the combined bank will be 40% larger than peers, bringing greater scale, operating leverage, and trading liquidity. All of that suggests a premium, not a discount. Why are these stocks trading here? One, it’s the complexity. This is a second-step IPO plus transformational M&A wrapped into one — not easy to analyze. Two, investors screening for banks are still looking at pre-deal metrics. After acquisition-related cost saves, the bank will comp more closely to peers at nearly double the valuation. Three, management and bankers need to set a valuation that incentivizes participation in the offering. Four, merger arb funds likely anchor to the proposed takeout price, overlooking the underlying economics of the business. Finally, the market still seems to ascribe CLBK a minority discount. That made sense with a 27% float and MHC structure, but the discount goes away entirely post-IPO. In short, the market seems to be looking backward when it should be looking forward. And what if the shares do nothing? Management will continue buying back stock. At a healthy discount to TBV, repurchases will be accretive to book, further exposing the valuation gap. Also important, unlike in many other conversions, IPO proceeds will not sit idly by on the balance sheet depressing ROE, as the company intends to allocate some of the proceeds immediately to the acquisition. Management projects +50% EPS accretion, putting pro forma valuation at ~10x 2027 EPS. Peers trade at similar or higher multiples despite having far less excess capital to drive EPS expansion. Altogether, NFBK and CLBK seem very asymmetric. I think we will look back and scratch our heads on why they’re trading here. P.S. This is somewhat complex. Feel free to reach out with questions. Disclosure: Long CLBK/NFBK. Not financial advice. Do your own due diligence. @dirtcheapbanks @alluvialcapital @PhilTimyan @thebankzhar @leevalueroach @blondesnmoney

$SOC new event to analyze. I will talk about the Coastal Commission action, but first an interim update I should have tweeted a month ago. The settlement with SB marked a milestone in the regulatory journey and propelled the stock from ~$15 to ~$25 over the course of a few weeks. Anyone who follows this knows the PT on the stock ranges from $25 to $125 post restart. The SB regulatory block was the most highly visible catalyst, and the resolution meant the investment had now turned into an oil asset valuation exercise with invisible regulatory hurdles/uncertainties (invisible because they had yet to surface or be disclosed by the company), which I have no edge on. Fast forward a month, everything seems to be sailing more or less smoothly when, BANG, the California Coastal Commission (CCC) comes out with an notice of violation and forced SOC to stop work on a bunch of the valves. I've spent some time reading the Coastal Act, looking into the SB approval and litigation history, and watching the recent CCC meeting where the CCC staff talks about their thinking on this. Here are what I'm reasonably confident to be facts: Developments in Coastal Zones generally require Coastal Development Permits (CDP). The CDP is uaully issued by the local government (SB county). Exxon originally received a CDP from the county planning department, but lost it on appeal to the county planning commission. SOC took over and sued the county and eventually got a settlement. The only thing I know about the settlement is that SB agreed that it "does not have jurisdiction over Pacific Pipeline Company’s (“PPC”) installation of 16 new safety valves" - from the Sep 3 8-K. On the question of CDP, the CCC can claim jurisdiction in a situation where the local government has decided to not exercise jurisdiction. Here the CCC apparently sent a letter to SB asking them "are you relinquishing jurisdiction?" SB didn't respond beyond CCC's response deadline. CCC then turns around and issues the notice of violation to SOC, "We believe you need a CDP and you don't have a CDP, so stop and apply for a CDP". SOC says "we don't think we need a CDP" (see SOC's latest press release sableoffshore.com/news/news-deta…), but they stopped work anyway. Here is my analysis: I believe the key to this situation rests on the exact content of the settlement between SOC and SB. I've looked at the 8-K and the federal district case docket, and I don't think the settlement agreement is public. So here are two hypotheticals that are both consistent with the little disclosure we got on the 8-K. The settlement could have been something along the lines of, "the SB county planning commission exceeded its jurisdiction in reversing the planning department approval of the permits". In this case, the permits, including the CDP, are reinstated. Meaning SB properly exercised its jurisdiction under the Coastal Act and issued a CDP to SOC. Alternatively the settlement could have been "SB county has no jurisdiction whatsoever over the installation of the valves, so NO permits or approvals are required from SB county". In this case, SB says SOC never needed a CDP because it has no jurisdiction, and SOC does not have a CDP. The important distinction between the two hypotheticals is, in the first one SB says it does have jurisdiction uner the Coastal Act and it approves a CDP, while in the second case SB says it doesn't think it has jurisdiction under the Coastal Act. In the second case, the CCC can step in and say, "we think you (SB) do have jurisdiction, and since you're not exercising it, now we can, and we will". One might argue that this was already litigated and settled. The answer to that is, yes, but only with SB county, you'd have to litigate this all over again with the CCC if you don't think the valves are subject to the Coastal Act and the CDP requirement. The CCC commissioners are political appointees and many are elected local officials, which means it is much more political than a technical regulator like the OFSM. If SOC did not get a CDP from SB county, I believe the CCC will not go away and will be a huge pain to deal with. For an illustration of the CCC's political nature, note that in the same meeting where the CCC staff discussed their enforcement against SOC, the commissioners struck down a SpaceX application for extra launches off the coast of California because of Elon Musk's support for Donald Trump. politico.com/news/2024/10/1… So...which way did the settlement go? Based on wording in the settlement 8-K, SOC's PR in response to the CCC notice, and the fact that SOC stopped work, I'm slightly (but not strongly) inclined to think the lawyers messed up and SOC does not have that CDP. If they did have the CDP, they should have mentioned that in their PR response to the CCC. Another possibility is the the settlement is a little vague on the specific question of SB's jurisdiction under the Coastal Act and the status of the original CDP. In this case, SOC would want SB's help in clarifying in SOC's favor. I don't see a lot of motivation for SB to do that. The litigation against SB is settled one way or another, if SOC wants to sue again, it'll have to be against the CCC. If SOC can show that it has a proper CDP from SB county, which i think is possible, then I believe the CCC has not power here and we're back to the races.